Confidentiality under attack by bank compliance, is this justified?

bank compliance

Because of Anti-Money Laundering laws and regulations, the confidentiality is under attack by bank compliance departments, onboarding clients with privacy shields is becoming difficult.

Guidelines of OECD and FATF as well as regulators in many countries are prompt to consider business confidentiality practices as UNUSUAL, the services providers are therefore hesitating before providing such services, often to decrease difficulties for bank account opening and maintenance.

In fact, financial institutions should consider clients using privacy tools as more attractive than fully transparent clients, the concept could be surprising but is quite logical.

The services provider’s compliance process will be more stringent for clients using nominee services (and/or more complex business and privacy confidentiality systems), their responsibilities as gatekeepers being engaged.

The client’s onboarding

The services providers will obviously question the reasons behind the needs for privacy and business confidentiality, the risk of seeing their services misused for various reasons is high. The providers will also automatically question the status of the ultimate beneficial owners, making sure that they are the real ones.

The level of scrutiny will be higher, the process longer, the questioning pretty intensive and a compliance report with documents and proofs demonstrating the effectiveness of the controls will definitively engage the responsibility of the services provider.

Monitoring, maintenance and client’s activities

A nominee director has very important responsibilities, a lack of attention and improper monitoring could easily be interpreted as wilful blindness.

A nominee director will not be able to retrench behind a letter of indemnify, he will stand in front of the potential issues and will have to deal with it, one way or another.

In consequences, the individual and entities protecting privacy and business confidentiality are erected as SUPER compliance officers, they will work along the bank compliance department for the onboarding and monitoring of their client.

Clients using privacy and confidentiality tools are the best prospects for financial institutions.

As anyway the bank is fully informed about the ultimate beneficial owners, as register of controllers are accessible to law enforcements and tax authorities, as onboarding and monitoring has been conducted twice by separate and unbiased compliance teams, risks are well mitigated.

Behind privacy shield are standing clients with a fear to lose something, usually a nice wealth position, and so whom have something to protect … as a result such clients are very often more successful than “transparent” clients.

Criminals are facing difficulties with nominee services

  1. Multiplication of KYC procedures and enhanced compliance render the misuse of services difficult and costly.
  2. Follow the money systematic approach by law enforcement will track the funds to the individual criminal, except if a compensation with a cross border operation is performed.
  3. It’s a long process to raise the company turnover slowly in order to avoid detection by monitoring software and compliance team.
  4. Punishments are high for the nominee directors and shareholders wrongly implicated, renting a name only is a thing from the past.

But the professional training of compliance officers on the topic of criminals using nominee services is misleading, the same when the Counter-Financing of terrorism is explained, saying that terrorists are using banks is at best misinformation.

Privacy and confidentiality, legitimate needs?

  1. The (young?) compliance officers are sharing their life events on Facebook and Instagram, understanding the simple fact that someone is uneasy to share publicly about his private and professional activities is difficult, nevertheless not wanting to share with the public should be respected as this was the norm for decades.
  2. Security concerns are legitimate, especially with the COVID situation and the fact that business owners are more captive than ever, a busy travelling schedule was it itself a protection.
  3. Banks are monitoring their clients, business owners are monitoring their competition and in an era of transparency being discreet, being secret could be a definitive competitive advantage.
  4. Bloggers and badly informed (or corrupted) journalists are destroying careers and companies on the first page of a publication, to often retract themselves few months ago in 3 lines on the fifth page.
  5. Governments and businesses are not all benevolent and pro-business, some are using publicly obtainable information to target opponents.
  6. Ultimate beneficial owners are known from the banks and law enforcement agencies, the right of the PUBLIC to access information is questionable, why should we know about the activities of our neighbor?   

Where to obtain nominee services and other services to protect privacy and confidentiality?

Basically, everywhere but not in Europe, with the notable exception of Switzerland. The services should be provided by professionals with a long and costly compliance process. The harder the better as this will guarantee that the services are not provided lightly and that your service provider is not hosting criminals. You don’t want to be client in a company servicing criminals.

Hong Kong is a good location as the absence of public register of controllers and a long practice of nominee directors, nominee shareholders, trust and other structures is part of its history and surely still part of its future.